Dividend recap deals take spotlight as jumbo LBOs wait in the wings

Private equity sponsor-led activity is set to dominate the European leveraged loan market in 2022, having already made up 87% of the total volume in January. A smaller pipeline of buyouts lining up to launch means activity in the first half of the year is more likely to be focused on dividend recapitalizations, or 'recaps,' but when LBO financings do come to market, they are likely to be jumbo-sized.

In the 12 months to the end of January, private equity-led volume in the European loan market stood at €62.36 billion, which is higher than in any recent full year.

In January alone, sponsor-led volume accounted for €11.07 billion of the €12.70 billion total monthly loan issuance, according to LCD. Of January's sponsored loan deals, 67%, or €7.37 billion, of that volume was used to back M&A, while 25%, or €2.73 billion, supported recaps.

January's recap activity included a €975 million facility from sports management firm Dorna Sports that was raised to repay debt and fund a shareholder dividend, an upsized €925 million facility to be used by beauty firm Wella to fund a dividend and refinance debt, and a €500 million term loan from bottle manufacturer Saverglass that was earmarked to repay debt and support the repayment of roughly €100 million in convertible bonds.

Overall in 2021, sponsored dividend recap loan volume reached €20.55 billion in Europe, accounting for almost 19% of the total volume of sponsored loans reported across the year at €110 billion — the highest such annual issuance since 2007.

These deals resulted in €7.81 billion of cash returned to shareholders via dividends raised in the loan market, which is the highest level seen since 2007. Via bonds, meanwhile, the cash returned to shareholders was €3.74 billion — the highest ever recorded by LCD.

Settlement figure

Although the volatility that hit the market over the past fortnight has dampened issuers' immediate appetite to bring opportunistic deals such as dividend recaps, it is not expected to hamper activity for very long. Bankers noted that pricing in primary markets has now settled around the E+400 level and is resisting any pressure to widen to 4.25%. Indeed, once the broader choppiness settles, market participants said it is natural that sponsors will look to take cash out through recaps — especially until the flow of buyout deals in the financing markets picks up later in the year.

"We've had some buyout activity at the beginning of the year, but I think the second quarter will be quieter for new deals," one banker said. "We will see how things play out, but when there's not much by way of LBO deals out there, then for sponsors it's a good opportunity to do recaps."

Indeed, for the immediate future, the forward calendar of expected buyout deals is not well-filled, standing at just €11.51 billion, of which €3.77 billion is institutional debt, as of Feb. 14. This total includes the financing supporting Hellman & Friedman's take-private offer for pet platform Zooplus, the funding for the public-to-private acquisition of Dutch administrative services provider Intertrust and the €2.545 billion-equivalent first- and second-lien loan package supporting CVC's takeover of Unilever's tea business, Ekaterra.

Syndication of senior debt backing the takeover of U.K. supermarket group Morrisons by CD&R is also still to come, after the £1.2 billion junior secured tranche was sold down to Canada Pension Plan Investment Board earlier in 2022.

Powder puff

But while the first half of the year is not likely to be a great one for buyout activity, there is likely to be much more supply later in 2022, with sponsors reported to be flush with dry powder ready to put to work. Indeed, market participants suggest that private equity firms' fundraising activity is at its highest level in memory. 2021 saw more than €140 billion of capital committed to funds, according to data from Preqin, and sources suggest that this pace has not slowed in 2022.

Fundraising efforts in 2021 helped take the amount of dry powder ready to be put to work in Europe by the end of January to more than $230 billion, according to Preqin.

This backdrop of soaring levels of dry powder has proved strongly supportive to a large volume of buyouts over the last year. In the 12 months to the end of January, the total transaction volume of initial and secondary buyouts reached €109 billion, according to LCD data.

Market participants said growing buyout volume totals illustrate not only an increase in the number of private equity-led acquisitions but also an uptick in the size of European buyouts, as sponsors in the region become increasingly comfortable with — and interested in — holding jumbo assets, while private equity buyers are now circling businesses that would have once been regarded as out of their league in terms of size. While bankers suggest assets such as GlaxoSmithKline's consumer healthcare business, for which Unilever submitted a £50 billion offer in January, are likely to fall into leveraged finance hands, for example, elsewhere the potential sale of Novartis' generics pharmaceutical business Sandoz, which could be valued at roughly $25 billion, is under consideration by private equity buyers.

Meanwhile, bankers noted that even as deal sizes grow, the debt financing markets have remained supportive of sponsors' acquisitive strategies. In the 12 months to the end of January, the European loan market absorbed €49.59 billion of sponsored buyout volume, and despite the softness in the market over the past couple of weeks, the sector is seen as remarkably reliable. "There's no issue with accessing credit," one private equity specialist said. "The focus has instead been on finding equity and fundraising."